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Hong Kong Currency Defense Kills Fixed-Rate Mortgage Market

(Bloomberg) -- Hong Kong’s banks, blindsided by rising funding costs due to the city’s costly defense of its currency peg, are clamping down on popular fixed-rate mortgages.

Bank of East Asia Ltd. is no longer accepting applications for these home loans “due to recent movements in interest rates,” the lender said in an emailed reply on Friday, more than two months before it had originally planned to end the program. Industrial & Commercial Bank of China (Asia) Ltd. will stop from May 1. Bigger rivals HSBC Holdings Plc and BOC Hong Kong (Holdings) Ltd. stopped offering fixed-rate mortgages last month.

These loans were provided at 1.68 percent for the first year of a new mortgage, lower than the 2.15 percent rate that currently prevails in the industry, according to data from Centaline Mortgage Broker Ltd. The discount became unsustainable as Hong Kong’s interbank rates are rising, with the three-month borrowing cost having hit the highest since December 2008 and the monetary authority warning Thursday that costs are expected to climb.

“The banks will have to bear all the costs at least for the first year if they continue offering fixed-rate loans,” said Ivy Wong, managing director at Centaline Mortgage. “Some of them were probably losing money already.”

Battlefield

The industry had turned into a battlefield since 2016 as house prices rose to records and fixed-rate mortgages were an effective weapon to lure customers in the world’s least affordable housing market. Now borrowers will have to price in the possibility of higher mortgage rates as early as the second half of this year as the U.S. tightens monetary policy.

Hong Kong interbank offered rates are likely to trend upward over the next six-to-twelve months, according to Gary Yau, emerging market strategist at Credit Agricole CIB in Hong Kong. That’s because the Hong Kong Monetary Authority will keep mopping up liquidity as the Hong Kong dollar should continue to test the HK$7.85 per dollar level, given that the gap between the Hong Kong and U.S. interest rates is still around 1 percentage point, he said.

The one-month Hong Kong dollar Hibor -- the benchmark for local mortgage rates -- rose 2 basis points on Friday to the highest level since March 29.

The ratio of new mortgages linked to fixed rates rose to about 28 percent in February from 1.9 percent a year earlier, according to data compiled by Centaline Mortgage. Interbank rate-based new mortgages dropped to 68 percent in February from 86 percent in January, according to the HKMA.

Hong Kong’s mortgage market is dominated by the city’s biggest banks, led by HSBC and BOC Hong Kong, with the top three having a combined market share of 63 percent in terms of the number of loans extended for finished apartments this year, according to Centaline Mortgage. Bank of East Asia is the city’s fifth biggest mortgage lender.